News and views
There was volatility in both directions last night, overall sentiment remaining elevated. First, consensus-beating US earnings from Caterpillar etc boosted the S&P500 to its 2009 high of 956, but conviction to follow through was lacking. Then news that CIT is still in the bankruptcy zone, despite early week reports to the contrary, dampened risk appetite and sent the index to 940. Bernanke’s dovish testimony also imparted a cautious tone. Finally, equities rebounded into the close, for a net gain of only 0.4%, and just under the key 956 level. Bernanke’s comment that benign inflation means rates can be kept exceptionally low for an extended period helped US 10yr treasuries soar, from a yield of 3.66% to 3.45%.
EUR peaked at 1.4277 during the mid-London session and fell to 1.4165 during the “risk-off” phase, bouncing back to the current 1.4220 area. GBP gyrated with the rest, but underperformed after the BOE’s Bean talked the currency lower. JPY outperformed from 94.40 to 93.30 on the stall in risk.
AUD hit a session high of 0.8193, before falling and rising in a one cent range. An article by McCrann produced a selloff in the AU rates markets.
NZD reached 0.6610, the key resistance area, and was rebuffed back to 0.6500, settling later at 0.6570. AUD/NZD ranged higher from 1.2380 to 1.2470.
US Fed chairman delivers the Semiannual Monetary Policy Report to the Congress. In accompanying testimony Bernanke noted, on the economy, “the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization. The labor market, however, has continued to weaken. Consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009.” Re monetary policy: “The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.” On markets: “financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain. Nevertheless, on net, the past few months have seen some notable improvements.” Re eventual policy retightening (the exit strategy): “it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation. of our holdings of longer-term securities.
On the US data front, the Chicago Fed national activity index, which is essentially a coincident index of economic activity, compiled from 85 previously released indicators, bottomed out at –4.03 in January. It has risen sharply since then, but at –1.80 in June it is still consistent with activity being “well below its historical trend”. Other data included the weekly retail reports for the week ended 18/7, with the Redbook steady at –1.7%, but chain store sales bouncing 0.5% after falling –0.9% in the prior week.
UK public finances well into the red. June’s £13bn deficit was the largest June deficit ever recorded, and compared to £7.5bn in June last year. More evidence of the parlous state of UK finances.
The Bank of Canada left its key rate at 0.25% and maintained its conditional commitment to hold policy steady until the middle of 2010. The statement included revised forecasts: “the economy will contract by 2.3 per cent in 2009 and then grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, reaching production capacity in the middle of 2011.”
Outlook
The NZD is at the important 0.66 resistance level, markets watching for signs of either a breakthrough or a failure to determine medium term direction. Support today should be around 0.6500, with resistance at 0.66, a break of which would see NZD much higher.
